Caribbean countries under attack

Once again Commonwealth Caribbean countries are under attack as “tax havens”, even though they are nothing of the sort. This time it is not only the usual countries that have been listed. Trinidad and Tobago has been included, and we can bet that Jamaica and Guyana will be added, unless immediate action is taken.{{more}}

The so-called “tax havens” lists are unfair, unjust and downright wrong. Yet, they have been produced by the Commission of the European Union (EU) and now, completely inappropriately, by individual State governments within the United States of America (US) and even by the District of Columbia.

I use the words ‘completely inappropriately’ to describe the naming of sovereign nations by individual State governments of the US, because these nations conduct their relations with the Federal Government of the US and not with its individual States. It is the Federal Government that has responsibility for, and authority over, the external relations of the US. By naming foreign countries as “tax havens”, the State governments in the US have exceeded their power. They also create confusion among sovereign states and erode confidence in the US Federal Government, with which they expect to conduct their relations.

Normally, there may be an inclination to ignore the tax haven lists produced by States such as Oregon and Montana, particularly as similar lists formulated by Kentucky, New Hampshire and Maine never made it into law. But, there are dangerous consequences in simply turning a blind eye to the lists of these states. The first is the reputational damage that they do to the countries that are named. There is more than a whiff of unpleasantness that attaches to the term, tax haven. People and organizations doing legitimate business shy away from anything that might taint them. Hence, the branded Caribbean countries could lose much needed business and revenues.

And, here it may be worth detailing the Commonwealth Caribbean jurisdictions that appear on these State government lists: Anguilla, Antigua and Barbuda, Bahamas, Barbados, Bermuda, the British Virgin Islands, Cayman Islands, Dominica, St Lucia, St Kitts-Nevis, St Lucia, Montserrat and Trinidad and Tobago.

A second and potentially more dangerous consequence of the tax haven lists is that banks in US and Europe might chose to end correspondent relations with financial institutions in all these Caribbean jurisdictions. If they did so, the offshore banking sector and the local indigenous banks in all these countries could collapse with detrimental effects on their economies.

This notion is by no means far-fetched. The penalties for US and EU banks are draconian should they be found to have facilitated money laundering and tax evasion – even if they did so unknowingly. Therefore, the US and EU banks now weigh the risks they run against the rewards they get from providing correspondent relations to Caribbean financial institutions. Since the totality of Caribbean banking transactions for offshore and local indigenous banks is small in comparison with their total income, the EU and US banks could choose to avoid the risk by not doing business with banks in listed tax havens.

In the case of the tax havens list produced by the EU Commission, that list was formulated on the basis that at least 10 EU nations identified a jurisdiction as a tax haven. So, even though a number of Commonwealth Caribbean countries, such as Antigua and Barbuda, Bahamas and Barbados, have tax information exchange agreements with 18 of the 28 EU nations, they were unfairly and wrongly branded by the EU Commission.

Remarkably, one EU government that the EU Commission identified as among the 10 that named Caribbean jurisdictions, has indicated that it was not consulted in the formulation of the tax havens list and it has disavowed it. Nonetheless, the damage has been done, and the Caribbean’s task is now to expose the wrongfulness of the branding and to seek immediate correction.

With regard to the State governments of the US that have branded Caribbean jurisdictions, one of them has stated that it based its listing on “criteria originally established by the Organization for Economic Cooperation and Development (OECD) in 1998”. But, the world, including the OECD, has long since gone past the erroneous criteria used 17 years ago. The principal criteria applied back then for determining a tax haven was two-fold: is there no tax or low tax by the jurisdiction, and is payable tax hidden?

The Caribbean fought the OECD’s notion of ‘harmful tax competition’ and eventually it was agreed that tax competition is a legitimate form of competition and that sovereign states have the right to set their own rate of tax. Indeed, EU countries, the US and many other nations openly compete with one another for investment and in production costs through tax rates. Further, within the US individual States also compete with one another through the tax rates they set. Therefore, no country can be defined as a tax haven because it has no or low tax.

Now, if the country hides payable taxes from other countries, that is arguable ground for saying it is a tax haven. But, no Commonwealth country hides payable tax from the US or from the EU. Tax information exchange agreements exist and are enforced. And, even now, Commonwealth Caribbean countries are working with the US government and its Internal Revenue Service to implement FATCA – US law requiring financial institutions to report all US persons and companies that have accounts with them. Clearly, payable taxes are not hidden in these jurisdictions.

Caribbean countries are defending themselves against these outrageous slings and arrows, including by pointing out that the two internationally recognized bodies, the Financial Action Task Force and the OECD’s Global Tax Forum, have found them compliant with the standards they set.